A non-qualified annuity is an annuity purchased with after-tax dollars, meaning the money you use to fund it has already been taxed. Unlike qualified accounts such as IRAs or 401(k)s, non-qualified annuities have no annual contribution limits and no required minimum distributions (RMDs) during the owner’s lifetime.
Tax Treatment
Because you already paid taxes on the premium, only the gains are taxable when you withdraw. The IRS uses a “last in, first out” (LIFO) method, meaning gains come out first and are taxed as ordinary income. Once you have withdrawn all gains, the remaining withdrawals (your original premium, or cost basis) are tax-free.
If you withdraw before age 59 1/2, the gains portion may also be subject to a 10% IRS early withdrawal penalty.
Non-Qualified vs. Qualified Annuities
- Non-qualified: Funded with after-tax money. No contribution limits. No RMDs. Only gains are taxed.
- Qualified: Funded with pre-tax money (IRA, 401k rollover). Subject to contribution limits and RMDs. Entire withdrawal is taxed.
Most MYGA purchases are non-qualified, funded with savings, CD maturities, or other after-tax sources. Compare today’s best rates for non-qualified contracts.